It was a historic week for Wall Street, with the S&P 500 closing above the 5,700 points level for the first time ever. Meanwhile, the Dow surpassed and ended above the 42,000 points mark for the first time ever. The advance was driven by what was undoubtedly the most important event of the week, – the Federal Reserve on Wednesday delivered its first interest rate cut since the COVID-19 pandemic four years ago. And it was a bumper 50 basis point cut. That led to U.S. stocks ripping gains on Thursday and the S&P and Dow achieving the 5,700 and 42,000 milestones, respectively. For the week, the S&P added 1.4%, while the Nasdaq swelled 1.5%. The Dow climbed 1.6%.
The Federal Reserve’s decision to cut interest rates this week was a surprise to nobody. The US central bank had telegraphed the decision for weeks as it made inroads containing inflation and now seeks to prevent a wider slowdown in the economy. But the Fed went big, opting for a jumbo sized half point reduction instead of a more modest 25 basis point move. Now, for Fed watchers and traders, the question is what’s next.
Future Wealth’s View
Attempting to guess the Fed’s next move and making investing decisions based on that is ill advised. But, that is not going to stop the traders and quant funds from ramping bets toward another 50 basis point cut in the next meeting which is in November after the elections. However, the Fed’s projections — known as the dot plot — show only a narrow majority favor lowering rates by at least an additional half point this year.
The more important data points, in our view, is the inflation reading and unemployment rate. It is extremely important that inflation continues to trend down. Any reading that shows that inflation is back up will destroy all credibility that the Fed has tried hard to rebuild and of course, the markets will sell off immediately. Unemployment rate has to remain stable at current levels as well to lend credit to the Fed’s actions. If it begins to spike, the soft landing narrative could quickly turn ugly.
Quoting the economist Milton Friedman – “Inflation is just like alcoholism. In both cases, when you start drinking or when you start printing too much money, the good effects come first, the bad effects only come later.”